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Having key person insurance in place may make it easier to get certain types of financing or credit from banks, or infusions of capital from investors, because it helps to lower business risks. If your company merges or goes public, you may be required to have key person insurance on top executives.
Taking out key person insurance makes a definitive statement to the employee about his or her importance to the company. This can strengthen relationships and help in retaining these key people. You also have the option of offering part of a payout to the employee’s family. This makes the coverage part of the employee’s benefits package.
A policy that includes a cash value may offer the flexibility to take a withdrawal or loan against the insurance if your business needs cash.
Note that premiums on key person insurance are not deductible by the company. In order for proceeds from a key person life insurance policy to be tax free, the company must obtain the consent of the insured (the key person) before obtaining the policy and disclose certain information to him or her. Also, the company must file an annual form (IRS Form 8925) with its tax return, listing the number of key person policies owned by the company and whether consent for each was obtained. This requirement does not apply to policies purchased before Aug. 18, 2006.